ETD STIR Summary: SOFR progresses, but LIBOR still dominates.
In our weekly review of USD interest rate OTC volume, we reported that for the first time last week, the volume of SOFR products was over the volume of LIBOR products — even if still below the volume of EFFR products. On the ETD STIR side, SOFR continues to progress but has certainly not yet reach the LIBOR level. The SOFR 3M futures were last week at 28.1% of the total STIR futures for 59.8% for LIBOR - and 10.3% for EFFR 1M, 1.8% for SOFR 1M and 0.1% for BSBY. The daily volumes for the past couple of months are reported in Figure 1.
Figure 1:Volume in some STIR ETD futures since October 2021 (in thousands of contracts).
The steady progress of the SOFR daily volume is clearly visible since the start of 2021. LIBOR is supposed to be used only for risk reduction. Is this what is happening in the futures market? The answer can be seen in Figure 2 displaying the open interest for the different contract types. Since the start of the 2022, the LIBOR Futures OI is virtually unchanged, even if a couple of serial contracts have expired since. The volume does not correspond to risk reduction.
Figure 2: Open Interest in STIR ETD options since the start of 2022 (in millions of contracts).
We also provide some figure related to the options on futures. As reported in a recent blog, the options on SOFR futures have started to trade, but for options, the lag is even more important than for futures. The daily volume up to 1 March is provided in Figure 3.
Figure 3: Volume in some STIR ETD options since the start of 2022 (in thousands of contracts).
Even if there is some progress, the SOFR volume is still barely visible on the graph. The total volume of SOFR options is below the volume of the LIBOR 2-year mid-curve options, which are the third level of LIBOR options. As explained in previous blogs, those 2-year mid-curve options will be converted to SOFR mid-curve options. Potential explanantion for this choice by the market were discuss in the blog SOFR ETD options: Finally some activity.
Figure 4: Open Interest in STIR ETD options since the start of 2022 (in millions of contracts).
At the level of open interests, the SOFR progress is visible, but it is drarf by the LIBOR progress. Since the start of 2022, the open interest in LIBOR options has increased by 9 millions contracts while the SOFR options side has increased by 0.9 million contracts. The increased interest in the options is most probably related to the uncertainty about the monetary policy. Monetary policy watchers appear to express their volatility views through the LIBOR options instead than through the SOFR options. This is somehow similar to the linear products where monetary policy watcher appear reluctant to express their view through SOFR and do it through EFFR (see here).